Rules for the Investment of RRSP Money

Canada's parliament eliminated foreign-content restrictions in 2005.

Canada's parliament eliminated foreign-content restrictions in 2005.

Living and working in Canada is similar to living and working in the United States, though there are important differences. For example, the Canadian equivalent of an IRA is called Registered Retirement Savings Plan, or RRSP. It works in much the same way, but has its own set of rules for investment.

Contribution Rules

Investment in an RRSP begins with the amounts and timing of your contributions. You can open an RRSP as soon as you begin filing tax returns. In the year you turn 71, you'll have to stop contributing by Dec. 31 and begin converting the funds into retirement income. In between, the contribution limits will change periodically. For 2012, the limit was the lower of $22,970 or 18 percent of your earned income. Although the taxation year ends on Dec, 31, contributions toward the previous year's limit can be made for up to 60 days into the New Year.

Qualified Investments

The type of investment that can be held in an RRSP is regulated by the government. Permissible or "qualified" investments include cash holdings and money market funds; guaranteed investment certificates, or GICs (the Canadian equivalent of a CD); Canada Savings Bonds and corporate bonds; publicly traded shares; shares in a venture capital company; annuities; and mutual funds or exchange-traded funds. Historically, 70 percent to 80 percent of holdings were required to be in Canadian investments, but that was scrapped in the 2005 federal budget.

Conditionally Qualified Investments

Some investments are qualified subject to various restrictions, such as mortgages or shares in private corporations. For example, mortgages must be properties within Canada, but they can be either residential or commercial. If the mortgage is on your own home, or another property you have a personal connection with, the mortgage must be held by a conventional lender. Private corporations also have some "arm's-length" restrictions. For example, you can't invest in your aunt Mae's hair salon. However, you can hold up to a 10 percent or $25,000 stake in a private company as long as you have no personal connection with the company or its principals.


There are various penalties for violations of these RRSP investment rules. For example, the Canada Revenue Agency allows a lifetime total of $2,000 in over-contributions to your RRSP. If you exceed that amount, the excess is subject to a penalty of 1 percent per month. If you purchase investments that are deemed to be unqualified, you'll lose your deduction for the purchase amount and be required to pay tax on any gains from the investment. Tax legislation changes constantly, so it's vital to ensure that you're up to date on any CRA regulations that affect your holdings.

About the Author

Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.

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